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American decline

Discourse on American decline is ubiquitous these days. Paul Krugman conjectures that GOP delay tactics in the Senate have come to resemble Poland’s liberum veto, which paralyzed that nation, leaving it vulnerable to foreign depredation, in the 18th century. Arthur Herman speculates on US susceptibility to Chinese mercantile and electronic raids. My friends Ben Domenech and Francis Cianfrocca talk demographics and economic degringolade in this absorbing podcast. A study of this collection of stark graphs will demonstrate conclusively the precipitous deterioration in the US employment picture.

For some of us, of course, the decline of America was apparent long before this recession hit. It is my view, in fact, that both the recession and much of the reaction to it proffer a vivid illustration of the technocratic mentality which is right at the heart of that decline. For many years — decades, even — Wall Street operated under the debilitating illusion that human life could be successfully captured by formula and modeling of sufficient subtlety. Now we have legislators and publicists partaking of that same illusion in their arguments for a new regulatory regime for finance. It is not that these proposed reforms are all bad — I favor many of them myself — but that behind them stands that same technocratic vision of man, which is a deeply mistaken vision, a vision arising from a decay of philosophy and loss of spiritual grounding.

Comments (48)

For many years — decades, even — Wall Street operated under the debilitating illusion that human life could be successfully captured by formula and modeling of sufficient subtlety.

Those Wall Street types started out, in the initial rush, to be largely disaffected physicists and applied mathematicians. When I was in graduate school in the sciences, I had a discussion with a professor and we both agreed that a theoretician is a theoretician. The techniques and habits of thought are pretty much the same in any field. Many physicists and theoretical chemists who could not find a job in academia were going into economic modeling.

What we should have realized, of course, is that molecules have no personhood and economics depends on being able to theorize about living, breathing persons. No one has yet found any good theories for doing that. If persons were atoms, we would all be millionaires.

Starting in the late 1970s, Wall Street started actively recruiting advanced mathematicians, especially from MIT and Harvard. Long-Term Capital Management actually had a number of these types among its partners (not just among the analysts), and its successes were imitated all over the Street and across the Atlantic in London and around the world.

Yes, one of the greatest advances in economic thought came from the Austrian economist Carl Menger in the form of the Marginal Theory of Value which was expanded on and advanced by later Austrian economists Eugene von Bohm Bawerk (Theory of Capital), Ludwig von Mises (Theory of Money and Credit) and Friedrich von Hayek (Theory of Interest Rates and the Business Cycle). Once one understands that all prices for economic goods, services and money are formed by the aggregation, via the free market, of the subjective valuations of the consumers (goods and services) and savers (money) in an economy, then it becomes clear that economic modeling using any kind of mechanistic or mathematical process is to completely misapprehend the nature of economics. I don't think it's a coincidence that this sounds a bit like Ed Feser from The Last Superstition.

The modern economy is in many ways global, thus an accurate model of such an economy would require information about all the various subjective, conditional and un-conditional preferences of billions of economic agents for millions of economic goods and services. Furthermore, these preferences, unknowable to any group of human beings, change from moment to moment as the future unfolds into the present. To say the least, economic modeling in any kind of scientific sense is, like climate modeling, an unsolvable problem. Von Mises lays this all out in the first 7 or so chapters of his seminal work Human Action.

Thusly I would say that those who are most at fault for carrying out this false, technocratic view of human society are the economic central planners in government and especially the Federal Reserve. Financial derivatives and option-type products have been around for centuries but what hasn't existed before is an all-powerful central bank with a completely fiat currency regime at its disposal that also happens to serve as the world reserve currency. Having studied financial engineering at Columbia as the housing bubble was really taking off in '03-'04, I can say that the models used to value mortgage securities never accounted for the Fed's ability to move markets on such a massive scale. That (and their insatiable greed) was Wall Street's error, I'm not sure that it was one based in technocracy.

Andrew, and the Austrians, are right. Human action and human circumstances are so complex and changeable that they cannot be reduced to a usable model. If you could produce a suitable model, you probably could efficiently command the economy. In truth, however, you cannot. Both the model and efficient command are impossible. Inescapable economic ignorance is the problem. It's a problem not owned up to by Keynes' general theory (or the current adminsitration's policies, which arise from that theory).

Human action and human circumstances are so complex and changeable that they cannot be reduced to a usable model.

This is true of HUMAN action involving free will, not of the animal portion of actions that humans and animals share, of course.

We pretty much understand how the kidney and bladder work, so that we can predict, pretty infallibly, what will happen if one drinks a six-pack of beer.

If economists based their predictions only on these aspects of human behavior, then they would largely be right. Since we are humans with free will, what they are trying to do, in reality, is model the will of God in human affairs, which they will never do. Since they can't do this, the next best thing is to try to reduce humans to their animal components, really, turn them into animals, by exploiting the passions, and then they will be easy to model, since we somewhat know how to model unthinking animals.

"next best thing is to try to reduce humans to their animal components, really, turn them into animals, by exploiting the passions..."

Good insight. Interesting that you would say that, because I have lately been teaching a similar idea to my children about commercials; that is, that one of their functions is to arouse our passions in order to diminish our rationality. I've even pointed out that it's an attempt to make us more like animals.

Human action and human circumstances are so complex and changeable that they cannot be reduced to a usable model.

Wait a minute. Maybe I am misreading the concept here, but this sounds a little harsh. I agree that it is impossible to "model" the entire range of human action over the broad scale (entire globe) for any extended period, such as 2 months. However, it is not impossible to model limited portions of that broad range, for short periods. We do that all the time whenever we do X planning that they will do Y, such as: offer a new product that combines functions previously requiring 2 products, in the expectation that we will sell the new product for a profit. We expect that if we reduce the price a little, we will increase sales a little. We expect that if we make all new movie discs in Blu-ray, that will boost sales of Blu-ray players. These are all examples of limited modeling.

What is impossible is to model the whole system, complete and entire. One of the reasons for that is obvious: modeling the entire system would create forecasting knowledge of the future which would, itself, modify how people act, thus short-circuiting the model. But the fact that we cannot do the entire system as a whole does not make it faulty science in attempting to do limited modeling.

I also agree that part of modern finances tends to treat humans as if they were cattle. A sound anthropology, human psychology, and sociology would avoid this error. Then a sound science of economics based on these would be possible without making invalid assumptions that ignore free will. And while such a science would never be a completed one, locking in the entire future of expected action, it would limit itself to a smaller scope that would indeed be capable of being modeled.

I think I agree with Tony. Surely the first step in building a model is the careful description of the system to be modeled; and this step always entails a fairly crabbed restriction of the system in question to only a few factors, chosen from among the relatively restricted population of factors understood well enough to admit of measurement in the first place, and which are therefore susceptible to modeling even in principle. And this is as true of modeling in "well understood" disciplines such as mechanics, as it is in economics. So no one is even trying to model the whole atmosphere, or the whole economy, or the whole firm (whatever they, or the press, say about their research programmes). Rather,they are modeling only tightly delimited abstractions of these concrete systems; for no concrete system can be adequately treated by any model that is even a bit less complex that the system itself; so that a perfectly adequate model will be every bit as intractable as the system to which it refers, and thus totally useless.

Econometric modeling is agnostic about the sources of preferences. Homo economicus is not in conflict with homo himself, but is rather the distillation of homo to a utility function. Modeling is abstraction; of _course_ it is in the final analysis inadequate to its referent. But what's the alternative? For, to think is to abstract, and is thus to cheat the fullness of the object of thought.

Notwithstanding all that, mistaking a model for the concrete system to which it refers is the most basic error of the researcher. Modelers love their creations as much as do novelists. It is one thing to respect the model, or the fictional character in his integrity, and not altogether inapt; but it is quite another to grapple with the world as it really is. The scientist must if he is to do any real work, or be really good, love first the concrete raw data , and let it guide and form his thought.

Thus to the extent that the geniuses on Wall Street thought that Americans are nothing but x, they erred. No concrete thing is ever really nothing but x.

You cannot know the full range and depth of the desires, plans, resources, opportunities, needs, commitments, external conditions, values and mental state of even one other person, let alone for millions or billions of persons. Indeed, you might not know all those things even of yourself. At any moment, any one of those factors might be the one that triggers or that prohibits an economic action. Further, those desires, plans, resources, opportunities, needs, commitments, external conditions, values and mental state are always in a state of flux -- for every person. Thus, even if you knew all those things for but one person, you wouldn't know them for long. Any model you construct upon that inescapably imperfect knowledge will be flawed. If you adopted that flawed model for the purposes of central economic planning, the results would be what they always have been -- disaster. Human action is not susceptible to the sort of knowledge necessary to build an efficient economic model.

In other words, humans aren't like a machine or like the natural world, of which usable models might be more readily constructed. Models work for things insofar as those things are not actually human.

The case is even more complex because of the existence of hybrid behavior. For instance, the automatic response is to eat when hungry, but sometimes, a person might refrain (such as when they are trying to lose weight). Human behavior can be modified, but the threshold changes from person to person. While we can model average behavior and thresholds, in order to arrive at a perfect model, we would need information about every individual.

Also, as the Asch studies have shown, people tend to follow the herd, but this tendency can be short-circuited if a single dissenter of influence is present. Even thresholds can be influenced, so even the averages are merely ballpark estimates. A small change may produce a large result.

What we should be concentrating on in economics is moral economics. Things would be vastly simplified if economics acted as if the work charity made sense within it. Man is made for charity and an economics that encourages this cannot be too far off of the best system.

I'm not sure I understand your point, although I know we share a deep skepticism about the efficiency of "central economic planning", I'm not sure I share your skepticism about economic modeling in general. After all, thanks to economic modeling I know fairly well that if Congress raised marginal income tax rates for American citizens to 75%, this would slow economic activity to a crawl (i.e. GDP would contract) and lead to all sorts of tax avoidance schemes and attempts to hide income. I could also tell you the basics of what would happen right now if the Fed raised interest rates to 15%. Etc. I wouldn't get every particular correct, but I'd get the broad outlines. So it seems like you are arguing that the government has no agency when it comes to economy, i.e. there is nothing it can do to effect the millions of decisions made by producers and consumers. I don't think this is correct. See Zimbabwe for further evidence that government matters.

I think this is correct. The Austrian School will say, however, that we are not and need not be, indeed should not be, agnostic about the source of economic phenomena when developing economic theory. Unlike scientific or naturalistic phenomena, the study of economic phenomena, much like Thomist philosophy, begins from the establishment of fundamental axioms known a priori. In this case the source of economic phenomena is human action, where human action is defined as purposeful behavior, as distinuished from reflexive movement or the movement of inanimate objects (which is not to say that inanimate or unconcious entities don't have purposes or final causes, just that they do not act in the sense that humans do). From this undeniable and incontrovertible truth of human action -- that man acts for the purpose of achieving a certain desired end by the choosing of specific means -- logical implications can be deduced and a body of economic thought can be constructed. Some of the immediate implications that can be drawn are that individuals act, not collectives or States, man acts within time and that his means of achieving his ends are scarce.

If follows then that if one wants to disprove a particular economic theory he would have to show logically that the conclusion does not follow from the premise or that the premise is mistaken, just as in Thomist philosophy. In fact, if one reads the economists of the Austrian School, they read much more like philosophers than scientists or mathmeticians. Empirical modeling or econometrics cannot prove or disprove economic theory. In this sense my previous comment was a bit sloppy in comparing economic modeling with climate modeling. Economic modeling in the mainstream, empirical sense cannot achieve, by the very nature of economics, what it claims to be able to achieve. Whereas I suppose it is theoretically possible to model the Earth's climate -- a chaotic system -- though the computing power needed to generate meaningful results from such a model certainly does not exist now and I imagine will never exist.

Getting back to the original post, the Wall Streeters certainly use models that don't reflect the totality of reality and they're aware of this almost all the time. Traders have models they use but trading is as much an art as a science and often the models serve only as guides. The people working at these prop (proprietary trading) desks can't afford to live in abstractions because they make P&L (profit and loss) reports at the close of every business day. They are much closer to genuine economic phenomena than government bureaucrats and statist academics. If the big banks believe in anything false or unsavory it is in bending the system any way possible to favor their balance sheets and bonus schedules at the expense of everyone else. The true believers of this technocratic nonsense are the economic central planners in government and academia.

After all, thanks to economic modeling I know fairly well that if Congress raised marginal income tax rates for American citizens to 75%, this would slow economic activity to a crawl (i.e. GDP would contract) and lead to all sorts of tax avoidance schemes and attempts to hide income. I could also tell you the basics of what would happen right now if the Fed raised interest rates to 15%.

Yes, this is correct but we don't know that something like these results would occur because of economic history or empiricism or because some computer model gave us this result. We know these things because we know certain things about human action a priori from which various implications follow that eventually give us these results logically. For example, to demonstrate the above result regarding marginal tax rates conclusively and to fully understand all of its implications requires knowledge of Menger's Theory of Value, Bohm Bawerk's Theory of Capital and von Mises' Theory of Money and Credit. Likewise the above result regarding interest rates involves von Mises as well as Hayek's Theory of Interest Rates and the Business Cycle.

We know these things because we know certain things about human action a priori

I doubt that we have a substantive disagreement here, Andrew, but please don't use the word "a priori" that way. You don't know _anything_ about human nature a priori. You know it from experiencing human nature--your own, if nothing else.

"We are unknown to ourselves, we men of knowledge--and with good reason. We have never sought ourselves--how could it happen that we should ever find ourselves? . . . So we are necessarily strangers to ourselves, we do not comprehend ourselves, we have to misunderstand ourselves, for us the law "Each is furthest from himself" applies to all eternity--we are not "men of knowledge" with respect to ourselves."

You cannot know the full range and depth of the desires, plans, resources, opportunities, needs, commitments, external conditions, values and mental state of even one other person, let alone for millions or billions of persons.

In other words, humans aren't like a machine or like the natural world, of which usable models might be more readily constructed.

Both quite right. But you can predict aggregated aspects of individual acts of human behavior with sufficient accuracy for planning purposes. For example, someone in the quartermaster's office can correctly estimate the amount of food needed over the next month for an army division, even though he cannot predict any single soldier's appetite and how he fulfills that from day to day. The soldier need not be restricted to exactly 4 oz this and 8 oz that etc for each day in order for the final amount to come out as predicted for the entire division.

Whatever mathematical formula the office uses, that's a model. And it works.

Models work for things insofar as those things are not actually human.

Not sure how (or whether) that applies in the above example. For cattle, we can plan for the right amount of food because we will decide for them how much they are allowed to eat. For the soldiers, we don't directly constrain them to each eat all of X amount and no more, yet we can model that limited system to get the total required with sufficient accuracy for planning.

I too harbor a very great mistrust of the engineers of the current financial arrangements and their methods. I agree very much with the McChicken that we should be looking more to simpler arrangements, with less so-called sophisticated techniques involved, all rooted in charity. (For example, how about just loaning out money that you actually have, instead of money that you don't have and then setting up all sorts of complex rules about how much money that you don't have can be lent out?) But that too is based in part on a prediction of human behavior: the more complex an arrangement and the more intermediate steps between an action and the natural adverse consequences that attend it, the more people will ignore the potential adverse consequences and engage in the behavior. And this too does not have to be an iron-bound law observed in every single individual in order to be fully confident that it will bear out in large populations.

So when does the collapse actually happen? When do the bankers start jumping out of high windows? When do we have to start carting around wheel-barrows full of dollars to buy a loaf of bread?

Frankly, I increasingly get the impression that this whole "financial crisis" thing has been grossly over-sold by people, on both the left and the right, who want to exploit it in support of their usual ideological agenda.

I increasingly get the impression that this whole "financial crisis" thing has been grossly over-sold

There was an acutely, existentially dangerous period of time, for a few weeks, in the fall of '08. What we have going on now is mostly just run of the mill economic adjustment, where long-term trends matter a lot but where short-term existential danger is muted to nonexistent. In fact, by the time "main street" became aware of the crisis the existential danger had passed, and what we were faced with - at least in time horizons measure in years rather than centuries - was just an ugly (for many) period of adjustment.

I could be wrong, I guess, but my money is where my mouth is on this one.

Steve -- check those unemployment graphs I linked to. Almost 9 million people (plus millions more in the U6 category) might beg to differ on the oversold part.

Andrew E. -- "Wall Streeters certainly use models that don't reflect the totality of reality and they're aware of this almost all the time." Well, even if that is true as the rule, it would seem that the exceptions can have some considerable impact. See, e.g., the AIGFP office in London, or the CDS-based modeling technique that provided the infrastructure for much of the mortgage-backed security market.

Steve,
There has been a $3 trillion intervention by various federal entities into the economy, nearly all for the purpose of averting a chain reaction collapse of credit markets, with another $8 trillion in commitments if needed. Is there some nihilistic requirement of bankers jumping off tall buildings and wheelbarrows of cash needed to purchase bread for it to "really count" as a financial meltdown?http://money.cnn.com/news/storysupplement/economy/bailouttracker/index.html

Zippy, what do you think is likely to happen in 8 to 10 years when we finally turn upside down on the ratio of income from SS tax to expenses paid on SS benefits? When we can't use "retirement" money to bolster the ordinary day-to-day expenses of government, to the tune of well over 200B a year. And when Medicare is also bankrupt, roughly the same time frame.

I can see us weathering various storms between now and then, but I have not been able to see a way out of those looming dead ends. I think that the result will be something that makes the Depression look like a minor short-term adjustment.

Well - is there any reason why I - poor arts & humanities guy that I am - shouldn't conclude that our financial overlords have managed everything perfectly well and that there's no reason to believe that they can't go on doing so for the foreseeable future?

Well, even if that is true as the rule, it would seem that the exceptions can have some considerable impact.

A significant part of the dynamic is, as you've pointed out before, the uniform and universal "if the [financial] world ends" discount in finance. In other words, the background assumption in virtually every financial deal - always present and sometimes stated in the many discussions I've had with investment bankers over the years - is that things continue to operate within a "normal" range. In still other words, "systemic" risk is someone else's problem, or really everyone's problem, or really-really is a meta-financial problem not a financial problem, because if the system is permitted to fail (as it nearly did in the fall of '08) then Weimar and its concomitants look like a picnic, and what the numbers say in a computer about my bank accounts becomes utterly irrelevant. Indeed, what the files say in the county property registrar become equally irrelevant, as does the pink slip for my car. In such an eventuality my marksmanship (for example) is likely to be far more important than my bank balance.

Tony:
W.r.t the looming (in terms of decades at least -- not years, at any rate, and not centuries) entitlement crisis, I have no idea, except that I'll say the following: The impressions people have about that to which they are entitled may reflect formalities like current statutes and pieces of paper in files; but reality is very likely to differ from those impressions. Blood, stones, and all that. This has already happened in private institutions with, for example, sundry "resets" of traditional pension funds (just ask your friendly neighborhood airline pilot).

Steve I have the same suspicions, made more bitter by my being unable to make any money at all. The most unprecedented economic crisis since the Depression left the world economy barely ruffled. Although the nostrums of the globalisers now draw only sniggers, the sophisticated analysis by Hermann Schwartz in his book Subprime Nation, might be of use to those of us who share Marx's mother's problem: how to make capital instead of merely talking about it.

Zippy, that's just it: blood and stones and all that is likely to mean something along the lines of telling Grandma that she can go back to the farm and work for her bread, there isn't any money to give her that's worth carrying around. But there are only 1/2 million farms, and about 20 million Grandmas.

I can't resist pointing out that the entitlement-caused financial crisis Tony and Zippy are talking about (and see no solution to) was _not_ caused by deregulation (of the financial market or any other) _nor_ by "capitalism" but straightforwardly by the seizing of massive, unconstitutional federal power on the part of Franklin Delano Roosevelt and the Congress that put his plans into effect. That plan was the set-up of a Ponzi scheme on a scale that Bernie Madoff could not have dreamed of. The only reason it hasn't come home to roost yet is that the federal government, unlike Madoff, has the power (they believe) to make money ex nihilo.

The only reason it hasn't come home to roost yet is that the federal government, unlike Madoff, has the power (they believe) to make money ex nihilo.

One additional reason the entitlement crisis hasn't hit yet is because the Ponzi scheme it is based upon has had positive cash flow up to now. And in fact even though the money taken in was immediately "spent", it is in principle very difficult to tell what that means. There is "spending" as in "on wine, women, and song"; and then there is "spending" as in buying a factory, or doing marketing work to build future income streams, or cultivating a community which produces tax and other revenues. The latter is more like what we colloquially think of as "saving" rather than "spending". Government accounting, unlike corporate accounting, provides no way to distinguish between them; and nobody in government has the incentive to change the accounting system to provide that kind of financially discriminating visibility.

Even when you put money into a savings account, you are "spending" that money. The thing you are buying is a senior interest in the assets of the bank.

Granted, a realistically cynical view of government spending will guess that the bulk of that spending is more of the "wine, women and song" variety than the investment/saving variety. But it is important for everyone to realize that we don't have any way of knowing, in detail, because the accounting simply isn't done.

Zippy, that's a good point. If the SS contribution money had been put into a reserve fund, the way a private retirement plan contribution is, that money would have been "spent" on presumably "investments" that would create more wealth so that down the road when the retiree actually needs the money there is more wealth available than the initial amount contributed to the fund. There is, presumably, some portion of overall federal spending that did in fact get spent on programs that are more in the nature of investments, such as interstate roads, railroads, education grants, and basic science grants, that probably have returned a pretty decent increase in wealth for the country as a whole. Though, of course, that wealth is not tallied in the SS system or its IOU's on the Treasury, it is out in the country in Bob's roadside diner, Bill's PhD. with which he invents a new imaging machine, and so on.

I think you are spot on that there is no satisfactory mechanism for distinguishing the "wine, woman and song" part of the gov spending from the investment part, but still more there is direct return to the Treasury of any of the increase in wealth so that we can measure and maintain appropriately what we really should have available for Bob's SS retirement years. The Treasury cannot draw on the increased wealth that the interstate highway system created to pay SS benefits. (Admittedly, the Treasury does draw on the increased wealth indirectly, by increased tax revenue from increased income, but that mechanism is too indirect and too broad to pinpoint any correlation between investment and available wealth for SS benefits).

One way to look at the entitlement crisis is that it is a failed experiment in making family irrelevant. Older people who did not have children and grandchildren to take care of them, counting instead on the Great Society to replace the family, are well and truly screwed.

But don't think for a moment that this implies the collapse of liberal capitalism. You'll see a "maximum voting age" to correspond with the minimum one before that happens. Conservatives always underestimate liberalism's immune system: its capacity to produce unprincipled exceptions rather than just die.

Admittedly, the Treasury does draw on the increased wealth indirectly, by increased tax revenue from increased income, but that mechanism is too indirect and too broad to pinpoint any correlation between investment and available wealth for SS benefits.

That is why I compared it to a marketing budget. A company does not draw on its marketing investment directly; but wise marketing investments nevertheless are an enormous factor in producing returns. Likewise, many government actions are doubtless efficacious in producing new tax revenues in excess of the investment. (And as with private sector investments the early period of an investment is cash-flow negative and only later are returns realized).

But we have no way of concretely tracking which ones, of settling various disputes with, you know, actual unbiased data and stuff, because settling those kinds of questions with actual unbiased data isn't what anyone wants. Why permit reality to interfere with political ideology?

The thing is, though, the populace are continually encouraged to think of the money as being "there" in some sense, invested for them, and linked to each person personally, more on the model of a real retirement fund. Try convincing a lot of retirees that the money has not been invested in a SS "trust fund" with their name on it. It's more or less impossible, because that's what they are _told_ and have been told for years. I don't know about you guys, but my husband and I receive regularly in the mail (I guess a time or two per year) notices from the Social Security administration making a direct link between the number of years one or the other of us has worked under Social Security and the money we "have coming" if we retire at this age or that, die, and so forth.

Yes, I get those too. I view them as short fiction of a particularly farcical sort, and throw them away.

As for the money "being there", the SS Administration itself sells that line with every breath and every statement about the future it puts out. The fact that the IOUs are backed by the full faith and credit of the US government sounds pretty good, until you realize that the only thing that sets benefit levels is law, and law can be changed any time they please. There is no binding contract that will force the gov to pay what current recipients get. (And if there were, the gov would end up bankrupt, out of business, and the money would be useless anyway).

Paul -- "Well, even if that is true as the rule, it would seem that the exceptions can have some considerable impact. See, e.g., the AIGFP office in London, or the CDS-based modeling technique that provided the infrastructure for much of the mortgage-backed security market."

These CDS contracts are supposed to act as a type of credit insurance against default or default-type events. The problem is that the CDS market is not an insurance market in any meaningful sense because these contracts don't have a sufficient list of exclusions. For example, these CDS contracts should have exclusions written into them which nullify any contingent claims in the case where a default event occurs as a result of interest rate policy by the Federal Reserve. Of course, this is difficult to determine with certainty within the timeline of the normal claims process, if it can be determined at all. The result is likely that if the CDS market functioned like a true insurance market then hardly any of these contracts would get written.

But if Wall Street assumes that the Fed can keep things steady then they can ignore the limitations to this market, simplify their models and begin writing trillions of dollars (notional) worth of these contracts and make big money. Now in this sense I suppose it can be said that Wall Street subscribes to the idea of a technocracy but I would argue they do this not necessarily because they think it's true (as do the statist bureaucrats and academics) but because if it is true then they stand to make lots of money. And besides, as they see it, either way the government will never leave them twisting in the wind and they were right. The government, through its intervention, has short-circuited the credit insurance market similar to what they've done with medical insurance by prohibiting medical insurance companies to exclude people based on pre-existing conditions, transforming insurance into a subsidy.

There is no binding contract that will force the gov to pay what current recipients get.

The same is true, in effect, with private pensions, as many have found out to their surprise and anger. Thus my crack about asking your friendly neighborhood airline pilot about private pension plans. On the other hand, the airlines are still flying despite the vanished pension funds, aren't they?

In effect, what people seem to want is to replace their otherwise inevitable dependence on their particular family and local community as they get older with putting money someplace which preserves and even modestly grows buying power with no risk of that buying power disappearing, even over a course of decades. But just because every little girl wants to ride on a flying pink unicorn that doesn't mean that it is possible: not even if an entire society really really believes in flying pink unicorns and clicks their ruby slippers together wishing for them.

what people seem to want is to replace their otherwise inevitable dependence on their particular family and local community as they get older

Having taken care of both my parents in their old age, I see this hope as a bit of a tall tale even if the theoretical money is there: For old people who have lots of money and no family around, there seems to be plenty of people who will help them spend it without any of that spending being particularly in their best interests. And if you are old and need care, it costs way more to have non-family provide that care than it does to have family provide the same care. And so on - there is no escaping the fact that declining abilities means depending on others. And if you are depending on someone who doesn't do it out of love, why do you think you can trust them?

But as we know, particular families and communities are unequal, even radically so, and so replacing them with a uniform and universal faceless imposed and constructed institution is absolutely necessary.

Of course that uniform and universal faceless institution for making the elderly all equal is likely to be Death; since Death doesn't operate under the same real-world economic constraints as life.

It can be demonstrated that fractional reserve lending is inflationary and cannot generate genuine economic growth which can only come about through savings and capital accumulation. Interest rates are powerful signals which carry very important information regarding the time preferences of consumers. High interest rates indicate a high time preference for consumption and low savings available for investment. Low interest rates indicate the opposite, that consumers are willing to become savers by forgoing present for future consumption. Fractional reserve banking and loose monetary policy (the default policy of all central banks) artifically suppress interest rates sending the false signal to producers that present consumption is being traded in for future consumption. Except that this really isn't the case, consumers are still consuming and so the physical resources have not actually been freed up in order to lengthen the production process to produce more future goods. The boom period is the period when present consumption is still taking place while at the same time new long-term projects are being undertaken. The bust comes when it is revealed that the resources are not in fact available to complete the long-term projects that were begun under the guise of low interest rates. Liquidation, if allowed to, follows and the process repeats.

In the present day under central banking and fiat currency the bust takes the form of a recession with the currency constantly losing purchasing power, whereas in the old days under a partial gold standard and fractional reserve banking the bust takes the form of a bank run and the currency retains or increases its purchasing power over time. Under the old (still not ideal) system savers were rewarded, under our current system savers are punished.

I would say it is very likely that under a banking system largely free from government intervention (no legal tender laws), deposit and lending banking would separate on their own without the need for Glass-Steagall-type legislation. Banking regulation is absolutely necessary though until the government gives up its monopoly control of the money supply which it should do as soon as possible.

Try convincing a lot of retirees that the money has not been invested in a SS "trust fund" with their name on it. It's more or less impossible, because that's what they are _told_ and have been told for years.

Maybe I am blessed with working with older coworkers who are part of the more educated middle class, but I have yet to meet a boomer-aged individual who believes that the federal government is sitting on a pile of several trillion dollars in cash with a few bricks of it earmarked for them. Rather, they earnestly believe that my generation and Gen X owe it to them, despite being smaller, to make up for what boomer-age and WWII generation politicians did with Social Security funds.

The real problem is that entitlement attitude. Bad things happen, that is life. What the elderly and the soon-to-be-elderly have done is trashed the national house while expecting their kids to clean up the mess. Talk about "justice toward the needy" (many of whom will be needy due to their own personally choices)? Leaving us with a national debt soon to exceed $60T (if one uses standard accounting techniques on the federal debt) negates all duties we may owe them as one group to another.

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